Buyer’s Agent’s Real Estate Commissions Could be in Jeopardy in a New Decision in Federal Court
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Recently, a federal jury in the Middle District of Missouri found the National Association of Realtors (“NAR”) and two major real estate brokerages—Keller Willams and HomeServices of America—liable under United States antitrust laws for conspiring to fix prices in the class action lawsuit, Burnett v. NAR, et al. Specifically, the jury found that the Defendants were artificially inflating home prices by requiring a commission to be paid to the buyer’s real estate agent by the seller at closing. The Defendants were ordered to pay $1.78 billion in damages to the 260,000 Plaintiffs who joined the class action. Due to the nature of the dispute, the Defendants could be forced to pay treble damages amounting to over $5.3 billion. While NAR has vowed to appeal the ruling, the decision could have dramatic implications for how realtors, specifically those representing buyers, are compensated.
It has been common practice for decades for real estate agents for both buyers and sellers to be paid their respective commissions at the closing of a real estate transaction by the seller. The commission is typically between 4% – 6% of the total purchase price of the property being sold and is split evenly between the agents. The requirement to pay a commission to the buyer’s agent is typically found within the listing agreement between the listing agent and the seller. Under its Cooperative Compensation Rule, NAR requires listing agents to include a commission fee payable to a buyer’s agent when listing the property for sale on the local multiple listing service (MLS) database. Realtors must be members of NAR and/or the local association of realtors to gain access to the MLS. The MLS provides a much more comprehensive look at a property than other online platforms such as Zillow or Redfin.
The Plaintiffs in Burnett argued that, by requiring a commission paid to a buyer’s agent by the seller, home prices were being kept unfairly high. They further stated that sellers should not be required to pay a buyer’s agent commission because a buyer’s agent is not performing services on behalf of a seller. NAR countered this argument stating that a buyer’s agent provides a service to the seller by bringing a bona fide buyer to the table who is qualified to purchase the property, when such a buyer would be less likely to even know about the property without the buyer’s agent being involved. They also emphasized to the jury that despite claims to the contrary by the Plaintiffs, commissions are always negotiable. The jury was not swayed by NAR’s arguments and found for the Plaintiffs.
Potential Effects Moving Forward
While NAR has vowed to appeal the jury’s finding, this decision has no doubt sent shockwaves through the industry. If the buyer’s agent’s commission is no longer paid by the seller, the price of the home will naturally decrease by the same amount. Consumer advocates say that the decision means that there will be more transparency in the negotiation process encouraging more negotiation between buyers and their agents about the size of the commission paid. While listing agents should be able to continue conducting business as usual, buyers may be willing to shop several agents to see who will take a lower commission. If fewer buyers seek out agents, or if they start aggressively negotiating down their fees, buyer-agent earnings could plummet.
Agents are justifiably concerned about how they will be compensated moving forward. As provided above, the compensation model for realtors has been standard for decades. If the ruling in Burnett is upheld and buyer’s agent fees cannot be collected from the seller at closing, the buyer’s agents will have to look to the buyer to pay their fee. Commissions can be sizeable depending on the property sold. Some buyers may not be able to afford the additional closing cost. Will lenders permit an agent’s fee to be rolled into a buyer’s mortgage? Could agents seek to be compensated on an hourly basis rather than a percentage of the purchase price? However this shakes out, realtors and their respective trade associations will have to work together to find a suitable alternative for themselves and for consumers.
It should be noted that a potential dramatic cut in buyer’s agent’s fees will likely have natural negative effects. Paying a very low or flat-rate commission may arguably lead to lower quality of service for the buyer. The old slogan, “you get what you pay for” is just as applicable with realtors as it is with any other professional industry. Agents willing to drastically cut their pay just for the sake of getting a deal may not be incentivized to provide top notch service. A quality buyer’s agent takes care of everything from negotiating the purchase price, handling the scheduling of inspections, negotiating repairs, to reviewing closing documents to ensure the accuracy of same. Will a cut-rate buyer’s agent handle all of these tasks and deal with the litany of additional buyer concerns along the way? It remains to be seen.
Given the decision in Burnett, there is little doubt that the real estate industry is about to undergo major change. Consumers stand to benefit from a price perspective, but it’s possible that the level of service for buyers will decrease if the compensation drastically drops off. No matter what the end result is, it will be incumbent among real estate agents to work towards a compensation model that meets their client’s needs but is also not cost-prohibitive to the party paying the commission.